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How to measure 3PL performance during the holiday season

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The holiday fulfillment season is coming to an end, and retailers are no doubt looking forward to drawing a breath and taking their foot off the gas.

But when peak season concludes, it’s vital to perform a post-mortem to understand how successful your 3PL’s fulfillment operation was – and whether any productivity or accuracy issues arose during the holiday season that impacted your revenue.

The occasional delivery delay or incorrect order might not seem like a serious issue. But over time, even minor problems can build up and result in thousands of dollars in lost revenue – and it’s even worse if these are preventable.

By measuring 3PL performance, you can straighten out supply chain management and remove efficiencies before they have a serious impact on your business.

Why is it important to measure holiday 3PL performance?

It’s your biggest revenue-earning opportunity

The holiday season represents the highest revenue potential across the entire year. According to the National Retail Federation, sales activity in November and December make up an average of 19% of a retailer’s total retail sales.

Whether you can meet customer expectations for a streamlined order fulfillment process and fast delivery all hinges on the reliability of your third-party logistics (3PL) partner. If customer satisfaction is high, you have an opportunity to retain these customers into the New Year and beyond. In sum, 3PL performance can either make or break holiday success.

Know whether your 3PL partner is meeting your requirements

Every brand should be checking in at regular intervals to see whether their 3PL is holding up their end of the bargain. Metrics included within your service level agreement (SLA) such as on-time shipping percentage or order time to fill, should always be monitored closely – especially during the holiday season.

Thanks to rising order volumes and more congested shipping networks, the holiday season is the period where a fulfillment provider is most likely to struggle to meet SLA requirements. This makes 3PL performance at this time of year a strong measure of your partner’s reliability, or whether it’s time to look for another provider.

Minimize opportunity costs

Opportunity costs resulting from poor supply chain management can be subtle, and it takes time for the consequences to come to light. But a lack of inventory accuracy or slow reverse logistics can chip away at your brand’s reputation and result in customers choosing not to make repeat purchases. But it’s difficult to measure these opportunity costs if you aren’t keeping a close eye on 3PL performance.

Tracking a variety of key performance indicators allows your brand to identify potential opportunity costs before they start harming your business. It gives you time to open up productive discussions with your 3PL partner to explore how you can achieve better success.

What are Key Performance Indicators (KPIs)?

Key performance indicators refer to a collection of metrics used to measure performance over a fixed period. In the context of 3PL performance and supply chain management, key performance indicators are a vital tool to assist brands in assessing the execution of various fulfillment services.

For example, if shipping accuracy is over 99% during the rest of the year, but drops to 93% during the holiday season, this could be a sign that your 3PL partner is struggling with warehouse management during peak season, and isn’t able to cope with the shipping burden presented by your business.

Tracking your chosen KPIs during the holiday season, as well as the rest of the year, allows you to monitor how your 3PL manages seasonal fluctuations – and whether you may have outgrown their capabilities.

7 KPIs to measure 3PL performance during the holiday season

1. Lead time

Lead time refers to how long it takes for an order to complete the entire fulfillment process, from the time an order is placed to when the customer receives the package on their doorstep.

As customer demands increase for rapid delivery, lead time has become an increasingly important metric to determine the efficiency of a 3PL’s supply chain process. For lead time to stay low, this requires a variety of benchmarks to be met, from order time to fill to the turnaround it takes to get a unit shipped.

Put simply, lead time is a measure of how well your partner is managing operational pressure during the holiday season. The higher your lead time becomes, the more likely it is your brand isn’t meeting customer expectations.

2. Fulfillment cost per unit

Cost per unit, also known as cost per order and cost per unit shipped, refers to all of the costs associated with producing, fulfilling, and delivering a completed order to your end customer. This includes:

  • Labor
  • Inventory management
  • Packaging
  • Utilities
  • Storage
  • Technology e.g. Warehouse Management System
  • Shipping costs
  • Returns processes
  • Account management

Cost per unit can be calculated like so:

Cost Per Order = total fulfillment cost/ total number of orders

Understanding the time and resources it takes to fulfill each order your brand receives is important to help you benchmark the appropriate cost per unit and identify where your 3PL may have missed out on cost savings during the holiday season. Breaking down the individual overheads that contribute to cost per unit allows you to see what is contributing to your operational expenses. For example, if your storage costs are ballooning, this could be due to SKU proliferation and inflated inventory levels.

3. Inventory shrinkage

Shrinkage occurs when inventory levels in your fulfillment center are dropping due to preventable reasons, and is an important part of supply chain management. This includes such as breakage, human error during stocktake, or theft. When units are lost or damaged, this results in lost sales opportunities and investments in capital that cannot be easily recouped.

Many businesses see shrinkage rates increase during the holiday season. This is down to a mixture of causes, such as less experienced seasonal staff, the rush to dispatch orders quickly, and seasonal SKUs that staff are less familiar with.

Most SLAs will provide third-party logistics providers an allowance for a certain percentage of inventory shrinkage that happens during the regular course of business. It’s important to review this following the holidays to make sure your 3PL hasn’t exceeded this limit.

Calculate your shrinkage rate using the formula below:

Inventory Shrinkage Rate = (recorded inventory – actual inventory) / recorded inventory

4. Dead stock

The holiday season is a great opportunity to bring in seasonal inventory that isn’t sold during the rest of the year. While SKUs such as gift kits, foodstuffs, and product bundles are incredibly popular in the lead-up to Christmas, demand can drop off sharply in the New Year. If popularity is overestimated, this inventory can turn into dead stock with a limited chance of selling.

Your 3PL should be able to avoid this eventuality by consulting sales data from previous years to gauge demand. But if dead stock is proving to be a major problem for your brand, it’s important to review this with your account manager and decide whether you need to embark on a SKU rationalization program to achieve your business goals.

You can determine how much dead stock is in your possession by comparing the lifecycle of a product with the average amount of time they spend on hand.

5. Perfect Order Rate (POR)

Understanding the accuracy of the order fulfillment process is important to understand whether your 3PL strategy is hitting the mark. One of the best ways to do this is by calculating your Perfect Order Rate (POR).

POR is a measure of 3PL performance according to several customer-facing criteria, such as:

  • Delivering orders on time to the correct location.
  • Shipping the correct merchandise.
  • Orders avoiding shipment damage.
  • Including complete and accurate documentation.

When one of the above benchmarks isn’t met for an individual order, this impacts your overall POR. In sum, lots of small mistakes can easily compound over time, thanks to sloppiness on behalf of your third-party logistics partner.

Of course, it isn’t realistic to expect your 3PL to achieve a POR of 100% all of the time. But keeping an eye on this key performance indicator allows you to set clear expectations with your partner and understand why errors are being made. For example, if shipment damage is a frequent issue, this is costing your brand a lot of revenue in replacement items and needs to be addressed.

You can calculate your POR during the holiday season by taking the total number of orders you fulfilled during that period. For example, if you received 2000 orders and 300 of these involved some kind of error, such as late delivery or damaged products:

300 / 2000 x 100 = 15% error rate

6. Time on Dock

Time on Dock refers to how long it takes for fresh inventory shipments to reach their intended picking location, where they are available to fulfill customer orders. This metric frequently suffers during the holiday season, when more frequent inventory shipments can result in pallets sitting on the loading stock waiting to be processed.

Any delay in inventory arriving at the warehouse picking shelves and bins can result in backlogs to order fulfillment, especially for popular products that sell out almost as soon as they are restocked. This makes Time of Dock an important measure of 3Pl performance during the holiday season. If Time on Dock lengthens, it could be a sign that your 3PL doesn’t have sufficient labor to meet your needs.

7. Exchange/Return rate

The holiday season typically sees a significant uptick in returns as consumers take back unwanted gifts. However, it’s important to note that not all returns are alike.

Brands need to measure what proportion of returns occurred during the holidays due to errors committed by your 3PL, such as damaged products or customers being sent the wrong size or color.

Mistakes like this are bad for your brand’s reputation, and so must be avoided at all costs. It’s also important to measure what proportion of exchanges your brand has issued versus refunds. Exchanges mean retained revenue, while refunds equal income lost. Crunching these numbers allow you to get an accurate picture of return costs during the holidays.

Although partnering with a 3PL avoids your business from needing to have direct involvement in logistics, it’s still important to keep a close eye on your fulfillment operation. By ensuring that your provider is meeting your requirements and not leaving valuable revenue on the table during the holiday season, you can more easily meet your growth goals and build more successful, productive 3PL partnerships.
But if it’s clear that your 3PL partner is no longer able to meet your business needs, it may be time to consider moving to a new provider. Check out our post on 7 signs it’s time to fire your 3PL to get a clear picture of when is a good time to make the switch.

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